My son lives in a tiny 2 story house with his wife and 1yr old daughter. (Plus 2 cats and a blur that I think might be a small dog.) The living room consists of just a couch and a 40in plasma attached to a stand with a couple of shelves and a Sony PS3. That's about all that will fit in that room. They are using the sound coming from the TV.

I usually spend about $500 on them for Christmas, so I'm thinking about a pair of M3's and a cheap receiver like I bought a few weeks ago, the Sony STR-DH500, or similar. Right now, the 2 of them come to exactly $500. Not sure where the speakers would be placed yet, I need to take a better look at their room.

That sounds like a pretty great gift, don't forget to throw in some speaker cable too and maybe some banana plugs to pretty it up. Maybe another HDMI cable as well to go from the AVR to the TV. It would be no fun for him to open it all up Christmas day and not be able to plug it all in.

Looks like 2 sets of HDMI and optical audio cables. 1 set from PS3 to AVR. 1 set from AVR to TV. And some speaker wire. As expensive as optical audio cable is, it would probably be better to spend a little more on the receiver that can send sound through the HDMI cables instead.

I just read the specs on the Sony STR-DH500, it will handle the sound and video from the ps3 no problem. It only decodes DTS and Dolby Digital, no DTS MA or Dolby True HD, but for the price of the receiver you can't expect much more. I don't see a need for optical cables in this setup... I could be mistaken though and if you do need optical calbles they can be inexpensive, along with the HDMI cables if you buy them from a place like monoprice.

As long as the receiver supports LPCM audio over HDMI you're good, I wouldn't pay extra for the HD codec support in the receiver, especially when paired with a PS3 which does a perfect job decoding on it's own. But I would not get a receiver in this day which had no HDMI audio support at all.